Whether the gain on shares is short term or long term is decided by the holding period of the stock.
The investment in stock is classified into two parts as per the income tax act
- Short term capital gains as per section 111A
- Short term capital gains other than section 111A
Short term capital gain as under section 111A
Equity stocks invested on a listed recognised stock exchange having a holding period of less than 12 months are considered short term capital gains.
Section 111A is applicable in the case of STCG on the purchase or sale of-
- Equity shares or equity-oriented mutual fund units
- Transferred through a recognised stock exchange
- Such transaction is liable to securities transaction tax (STT)
Here, please note that equity-oriented mutual fund is the funds which invest 65% of the investible funds in the equity shares of the domestic companies.
If the conditions mentioned above are satisfied, then the transfer of the stocks will be considered as ‘Short term capital gains under section 111A.
Instances of STCG covered under section 111A-
- STCG on sale of equity shares of a listed company through the recognised stock exchange and liable to STT
- STCG on sale of units of mutual funds through a recognised stock exchange and liable to STT
- STCG on sale of units of business trust
- STCG on sale of equity shares, units of business trust or units of the mutual fund through a recognised stock exchange located in IFSC (international financial service centre ) where consideration is paid in foreign currency, even if STT is not liable.
Tax rate applicable for STCG on shares
Short-term capital gain under section 111A is taxed at a flat tax rate of 15%.
Adjustment of STCG u/s 111A against basic exemption limit
If you are a resident as per income tax and your total income post various deductions is lower than the basic exemption limit, then you are entitled to set off your short-term capital gains and long-term capital gains on equity investments (> 1-year holding); and long-term capital gain on investments other than the equity investments, against the shortfall in your basic exemption limit.
Let us understand this by an illustration –
Mr Ajay has a taxable salary income is only Rs 1 lakh and a short-term capital gain on the sale of equity shares of Rs 4 lakh. Calculate STCG applicable.
Ans-As there is a shortfall in the absorption of the basic exemption limit of Mr Ajay by Rs 1.5 lakh, short-term capital gain on the sale of equity can be adjusted to the extent of Rs 1.50 lakh.
Tax will be applicable on a short-term capital gain of Rs 2.5 lakh only at a flat rate of 15%.
Points to be noted-
- if your total income including STCG after deduction is below Rs 2.5 Lakh, then your total tax liability is nil and also no liability will arise us/ 111A as deduction up to the basic exemption limit is allowed
- However, If your total income including STCG is more than Rs 2.5 Lakhs, then a flat 15% on STCG will be levied. (However rebate u/s 87a will be available if total income is less than 5 lakhs i.e up to Rs 12500 of tax liability as per current tax regime)
Deductions from STCG under section 80C-80U
Income tax does not allow any deduction under section 80C to 80U from the short term capital gains referred to section 111A.
However, the investor can claim such deduction short term capital gains other than covered under section 111A.
Illustration of STCG under section 111A
- Mr Ajay sold equity shares of XYZ Ltd (Indian company). through BSE after holding them for a period of 8 months. What will be the rate applicable on the STCG?
Ans-The sale of equity shares is a short term capital gain as its holding is less than 12 months. Also being equity shares transferred through the recognised stock exchange (STT paid ), this case is covered under section 111A. STCG will be charged at 15% (plus surcharge and cess as applicable).
- Mr Puneet sold units of a mutual fund (with more than 65% corpus vested in equity) through NSE after holding them for a period of 11 months. What will be capital gain tax applicable?
Ans-The sale of mutual funds is covered under section 111A as the fund is ‘equity-oriented mutual fund being more than 65% corpus in equity’. Also being held less than 12 months, it will be considered as short term capital gain. STCG will be charged at 15% (plus surcharge and cess as applicable).
- Mr Jay sold units of debt fund after holding them for a period of 10 months. What will be the capital gain tax applicable?
Ans.: The gain, in this case, is not covered under section 111A and is STCG other than covered under section 111A. STCG other than 111A is chargeable to tax at the normal rate applicable to Mr Jay. The normal rate applicable to Mr Jay will be determined on the basis of his total income.
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